Trading Crypto: Centralised Exchanges vs. Decentralised Exchanges

Trading Crypto: Centralised Exchanges vs. Decentralised Exchanges

Most people involved in the cryptocurrency space who aren’t motivated purely by monetary gain will likely find themselves at some point saying something like this: “One thing I really like about cryptocurrency is that it’s decentralised, and that the currency isn’t owned or controlled by a bank or state.”

This is not a bad ideal for a person to have, and when it comes to crypto it’s true—at least theoretically. When you delve into the details, though, it’s a little more complicated: in September 2018, 87% of bitcoin was controlled by 0.7% of addresses, and 62% was controlled by 0.1%. Compare this to the distribution of global capital overall, where in 2014 1% of the population controlled around 48% of wealth worldwide, and it’s clear that there is a centralisation of wealth occurring in crypto that is even more extreme than that which we are seeing in traditional markets.

A portion of these high-ownership addresses are those managed by current popular crypto exchanges. These exchanges, such as Binance and Gemini, have addresses that collectively account for an estimated 3.8% of the total bitcoin supply. And while it’s not particularly productive to talk about how to redistribute the huge portion of bitcoin controlled by private individuals—many of whom simply got in early—we certainly can talk about the systems which many of us depend on in order to move our coins around.

With all that in mind, this article will teach you to understand the key differences, successes, and failings of both centralised and decentralised crypto exchanges.

 

Centralised Exchanges

Most of the popular bitcoin and crypto exchanges are centralised, meaning that all the capital being traded by investors is handled primarily by a single entity: the exchange. Any coins you have stored on an exchange are being handled by that exchange. They exist nowhere else. Essentially, current crypto exchanges are a slightly modified version of the kinds of mechanisms that have existed in traditional finance for a long time prior to the invention of bitcoin, and they enable individuals to trade with each other in the easiest way possible: through a middleman who takes a fee in order to connect the traders and execute their trade.

This means, of course, that if you’re storing any portion of your crypto on an exchange, then that crypto is part of one of the massive exchange wallets that comprise almost 4% of all bitcoins. It’s because currency is centralised in these wallets that when Mt. Gox was hacked in 2013, many individual traders lost their crypto. Even though this crypto was theirs, technically, they did not have full control over it; instead, they opted to hand that control over to the exchange. And so, when the exchange made a mistake, that mistake ended up costing the users who opted to trust a centralised authority. This is a clear consequence of not embracing the trustless system bitcoin was built to be, and a great reminder that in a largely-unregulated and decentralised economic system, personal responsibility must trump all else.

In the meantime, you should be keeping your crypto in hard or paper storage. And maybe you should be checking out…

 

Decentralised Exchanges

Decentralised Exchanges (DEXs) are all the rage with crypto purists. There’s a reason for this: DEXs are truly trustless, and are therefore far better aligned with the underlying philosophy of the cryptocurrency revolution than the more traditional exchanges detailed above. In fact, there are a bunch of advantages to a decentralised exchange—but before we get to that, we should probably explain how they work.

The great thing about decentralised exchanges is that they’re actually not that complicated—certainly not as complicated as one might expect. A DEX is basically a peer-to-peer system for exchanging crypto—it is a system that facilitates trades between independent parties, rather than handling the trades from start to finish. The decentralised exchange does not handle its users’ crypto directly, and has no centralised server or equivalent setup, instead running off a series of discrete nodes, which are configured differently depending on the specific setup. DEXs you can check out now include IDEX, bisq, and district0x.

On these networks, cryptocurrency is transferred via smart contracts, which are written to hold one user’s coins in trustless escrow until matched with another user for a price on which both agree. The users are matched with one another, often completely anonymously, and the trade is executed in a single ‘atomic’ swap, at which time the exchange network verifies and confirms the smart contract—then, each user receives their requested cryptocurrency. Simple as that: the trade is complete.

The exchange then generally takes a small fee—written into the smart contract—from each user after each successful execution, which is paid to those operating the nodes.

It is worth noting that each decentralised exchange has its own specifics, and that this article serves primarily as a general overview of the governing principles. This is about as simple as we could make an explanation of decentralised exchanges. If you want to go into the details, you can check out the different DEXs linked in this article to see how each one operates

 

 

Pros and Cons of Decentralised and Centralised Exchanges 

Centralised Exchanges

Pros

Cons

Easy to use

Centralised; prone to hacking

Better, more detailed trading interfaces

Higher fees

More general consumer trust due to familiar interface and government regulation/approval

Not trustless; trades are executed by a middleman

High liquidity and volumes

You do not control your crypto directly

 

Anonymous trading is not possible

 

Can be subject to government interference

 

Account withdrawal issues

 

Entire network can go down if central servers have issues or need maintenance

 

Decentralised Exchanges

Pros

Cons

Trustless; trades are executed via smart contract

User interface is often limited and clunky

Lower fees

Consumers bear the bulk of the responsibility, disincentivising casual traders and investors

Decentralised; low chance of being hacked

Low liquidity

You control your crypto directly

Coin pairing is often limited by the underlying exchange technology

Anonymous trading is possible

 

 

Conclusion

On a surface level, it’s clear that a centralised exchange has more cons than pros, and a decentralised exchange has more pros than cons, which might make it tempting to say: decentralised exchanges are obviously better.

But that would be too simple.

We reckon it’s a little more complicated than that. In reality, each advantage and disadvantage is weighted, and those weights will be different for the crypto-enthusiast and the crypto-casual respectively. For the crypto-enthusiast, the trustless nature of a decentralised exchange may far outweigh its clunky user experience—but for the crypto-casual, the opposite is far more likely to be true. This is important, because the exchanges that are most popular and which have the most volume will define the nature of the crypto market. If centralised exchanges remain as popular as they currently are—and given that people still trust centralisation in crypto after the Mt. Gox fiasco, this seems likely—then the crypto market will remain largely centralised. This, as you’ve already likely noted, is in direct conflict with the principles upon which bitcoin was founded.

If centralised exchanges remain popular, then they will continue to compound that popularity—in the end, most crypto users will end up storing their currency on an exchange in the same way they would store fiat in a bank, at which point the market will have recreated a bastardised version of the very monster that crypto, ironically, sought to destroy. In this, we see the true power convenience has to incentivise the use of a product or service.

Unless decentralised exchanges become as intuitive as their centralised counterparts, it may well be likely that crypto economies remain centralised—a victim of human nature, as so many well-intentioned systems before them have been. For now, you can do your part and check out a decentralised exchange. Here are just a couple:

Good luck out there.




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How our Bitcoin Gift Card works

What is a Bitcoin Gift Card?

A Bitcoin Gift Card is the perfect way for the newcomer to get their first Bitcoin. It comes with a paper wallet and simple instructions to set up a software wallet so that you can transact with Bitcoin over the internet. Bitcoin Gift Cards are available in AU$25, $50, $100 and $500 denominations.

Who should buy a Bitcoin Gift Card?

Anyone new to Bitcoin will find no easier way to get their first Bitcoin.

They can be gifted by an existing cryptocurrency enthusiast, or bought by anyone wanting to get involved for the first time themselves.

How can I pay for my Bitcoin Gift Card?

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Can I use a Bitcoin Gift Card to top up an existing software wallet?

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What does my Bitcoin Gift Card include?

Your Bitcoin Deposit, wallet and key generation and network transfer.

How long does it take to receive my Bitcoin Gift Card?

Going through to checkout takes about 2 minutes. You won't find an easier process anywhere. Once you've placed your order, it can take between 10 and 60 minutes to receive your Bitcoin Gift Card depending on the speed of the Bitcoin network at time of purchase.

How our Flexi eGift Cards work

We have partnered with GiftPay, an aggregator of online deliverable eGift Cards in Australia.

Through our agreement with GiftPay, you are able to purchase a Flexi eGift Card from us, redeemable at a broad range of retailers in Australia.

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A Flexi eGift Card is an electronic gift card that lets you choose where you'd like to shop! In the past if you were given a gift card for a particular shop but didn't want to buy anything from that shop, you were stuck. But now with a Flexi eGift Card, you get to choose at which shop you spend your gift. 

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Where can I spend it?

You can spend your eGift Card at a broad range of Australian retailers. For a full list of our retailers, click here. (page showing full list of retailer logos)

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Your Flexi eGift Card will be emailed to you. Click the link in the email to open your Flexi eGift Card.

Then convert your Flexi eGift Card into any combination of gift cards or vouchers up to the total available balance. How you redeem your chosen gift card depends on the card or voucher chosen.

Pay a BPay Bill

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When you enter the amount you wish to pay, the BPAY biller code and your bill’s customer reference number, you will click through to our checkout.

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